Bulls, Inc. can sell a large piece of machinery for $90,000. The machinery originally cost $240,000 and has accumulated depreciation of $130,000. Bulls will have to pay a 5% sales commission on the sale. Rather than sell, Bulls is considering leasing the machine. It can be leased for 4 years for $24,000 per year. Bulls has estimated future operating expenses to be $3,000 per year, and Bulls will be responsible for those expenses. Which of the following options most accurately describes the analysis and decision for BullsA. Lease - because differential revenues are $6,000 if Bulls leases rather than sellsB. Lease - because Bulls will lose $20,000 if it sells the equipment for less than its $110,000 book valueC. Sell - because differential income of selling rather than leasing is $6,000D. Sell - because differential income is $1,500 if Bulls sells rather than leases

Question

Annie Schaefer

Business

27 May, 12:41

Bulls, Inc. can sell a large piece of machinery for $90,000. The machinery originally cost $240,000 and has accumulated depreciation of $130,000. Bulls will have to pay a 5% sales commission on the sale. Rather than sell, Bulls is considering leasing the machine. It can be leased for 4 years for $24,000 per year. Bulls has estimated future operating expenses to be $3,000 per year, and Bulls will be responsible for those expenses. Which of the following options most accurately describes the analysis and decision for BullsA. Lease - because differential revenues are $6,000 if Bulls leases rather than sellsB. Lease - because Bulls will lose $20,000 if it sells the equipment for less than its $110,000 book valueC. Sell - because differential income of selling rather than leasing is $6,000D. Sell - because differential income is $1,500 if Bulls sells rather than leases

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Answers (1)

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Roberto Hendrix · Answer 1

D) Sell - because differential income is $1,500 if Bulls sells rather than leases

Explanation:

Differential revenues and costs equal the difference in revenues or costs resulting from choosing one alternative course of action. This concept is very similar to opportunity costs analysis, since it compares what would happen if one decision is taken versus taking another alternative decision.

If Bull sells the machine, they will receive = $90,000 - 5% = $85,500

If Bulls lease the machine, they will receive = ($24,000 - $3,000) x 4 years = $84,000

Differential revenue = $85,500 - $84,000 = $1,500